Friday, November 17, 2017

Housing slowdown looks like it is ending


 - by New Deal democrat

I'll have a much more detailed report next week at XE.com, but here's the bullet point summary of this morning's housing permits and starts report:


  • single family permits made a new expansion high
  • single family starts made a new expansion high
  • total permits were just shy of their expansion high from last winter
  • the three month moving average of total starts, which smooths out volatility, made a new expansion high
  • the number of units for which a permit has been issued, but which have not yet been started, made a new expansion high

In short, this was an excellent report. It looks like the slowdown in housing that was brought about by the increase in mortgage rates one year ago is abating, as the demographic tailwind continues to assert itself. Meanwhile YoY interest rates are potentially within days of being lower, which will be a boon.

More next week.

Thursday, November 16, 2017

Industrial production and real retail sales evidence of strong underlying trend


 - by New Deal democrat

A couple of weeks ago I wrote:
Dallas Fed and the Chicago PMI both improved even more from September to October: ... As a result, even taking into account that these have been outperforming industrial production this year, it is likely that manufacturing production when it is reported for October several weeks from now will be a positive, and most likely slightly better than last month's.
The average of the four non-southern regional Fed manufacturing indexes was +20. The Chicago PMI was 66.2, which translates to +32.4. The average was roughly +22, which translates to +.4 in the industrial production manufacturing index. Even subtracting a few tenths of a percent still gave a positive number.

Well, overall industrial production, and the manufacturing index, both came in strong for October:



While some of this may be a hurricane related rebound, the above regional calculations show that the underlying national trend remains quite positive.

A similar situation obtains with regard to real retail sales.  The overall number was up +0.1%:



But even if we subtract out autos, given the need to replace ruined vehicles, real retail sales while not higher, maintained the big increase from September:



So the Doomers can't use the hurricanes as an excuse. Right now the economy is hitting on almost all cylinders (wage growth for nonsupervisory workers still stinks).

Bonddad's Wednesday Linkfest

EU GDP + .65 M/M, 2.5% Y/Y (Eurostat)
EU IP -.6% M/M. +3.3% Y/Y (Eurostat)
UK annual inflation at 3% (ONS)
Dallas Fed chief considering December hike (FT)
The UK interest rate curve is inverted at the short-end (FT)
11 trillion of negative yielding  debt (FT)
US Set to become major oil producer (FT)
Yellen says markets expect too much guidance (Marketwatch)
Sydney welcomes "Ferry McFrryface" (AP)
LA imports up (CR)
Long-term job declines in US manufacturing (Econbrowser)

Wednesday, November 15, 2017

No, We Won't See a Torrent of Investment From the Tax Bill

One of the arguments that Republicans are using to support their tax bill is that it will unleash investment.  The data says otherwise.  Currently, most US economic sectors are operating far below maximum capacity utilization.

Let's start with manufacturing:








The top chart shows the CU rate for manufacturing while the bottom two charts break the data down into durable and non-durable subsets.  All three charts tell the same story: capacity utilization is at low historical levels.  Right now, it makes far more sense for companies to bring unused capacity back online rather than buy new equipment.

     Let's turn to computer manufacturing and electric utilities:



Both charts tell a similar story: CU is low.  

Mining is the only industry where a boost in investment is possible:


We see far more peaks and valleys.

The counter-argument is that spare capacity is outdated; as orders increase companies will be forced to add new, more modern capacity.  The problem with this argument is industrial production is actually very weak:



I broke the data down into its component pieces in this article over at TLR Analytics.  IP is the weakest of the coincident indicators this cycle.

In order to see an increase in CU, we need industrial production to pick-up.  And that's just not happening.   




Tuesday, November 14, 2017

A curious divergence between borrowing and lending


- by New Deal democrat

The Senior Loan Officer Survey for the third quarter was reported by the Fed last week.  There was a curious divergence between the willingness of banks to lend vs. that of firms to borrow.

This post is up at XE.com.

Monday, November 13, 2017

2018 Midterm election economic forecast: a struggling expansion that may amplify a wave


 - by New Deal democrat

We are now one year out from the 2018 midterm elections. Generally speaking, only the more involved voters show up for midterms, which seem to turn mainly on how much voters who "strongly" disapprove of actions in Washington outnumber those who "strongly" approve. Last week I noted that this metric correlated very well with the Virginia results, which featured elevated turnout by strongly approving GOPers, but an even bigger surge by strongly disapproving Democrats. 

While the economy does not play so important a role as it does in presidential elections, certainly the economy is relevant to "strong" approval vs. disapproval.

So let's take a look at what the economy is likely to look like one year from now when midterm voters cast their ballots.  To cut to the chase, if you are a democrat and you were counting on a recession to drive angry voters to the polls, that's unlikely to happen. But on the other hand, the expansion is likely to be very lackluster, enough so that, if there is going to be a wave anyway, it may be amplified.

There are generally three sectors of long leading indicators: financial, producer, and consumer. The housing market is uniquely important, and straddles to some extent all three.
Let's start with the three background financial indicators. One is positive, and two  are mixed.

The yield curve, while narrower than it had been, nevertheless is still quite positive: 



[I still suspect that the yield curve is the indicator most likely to not accurately signal in our deflationary era.]

Real M1 is also very positive (blue in the graph below), but it is offset by a neutral real M2 (red):


M1 money supply is the lever most directly controlled by the Federal Reserve, and money is still being pumped into the system at a vigorous clip, while M2 shows that it is not flowing through quite so much.

Finally, credit conditions as determined by lending banks are mildly positive (blue in the graph below):



But on the other hand *demand* for those loans is soft (red). 

On the production side, corporate profits have rebounded from their pullback of 2015, but they have not made new highs:



Similarly, yields on corporate bonds are near their lows (a positive), but have failed to make neew lows in over a year (a negative):   



The housing market is also giving mixed signals. 

New home sales have recently made new highs:



But negatives in housing include mortgage rates,  which have failed to make new lows since 2013. Since 1981, the failure of mortgage rates to fall to new lows for more than three years has correlated with the weakening of the economy heading towards a recession:



Housing permits, both for all houses, and for the less volatile single family houses, have not made new highs since last winter:



and real residential fixed investment as a share of GDP has also declined in the last two quarters:



Finally, turning to the consumer indicators, in the last year the personal savings rate has declined substantially:



This has typically occurred somewhere from the middle of the cycle until late in the cycle.

But on the plus side, real retail sales per capita, which has peaked about 12 months before the last several recessions, has continued to improve:



The bullet-point summary of all these indicators is that we have a stretched but still spending consumer, muddling along producers, and wide open financial spigots. Overall these are a weak, but not yet negative, set of metrics.

Barring an outside shock, one year from now when midterm voters cast their ballots, we should expect an economy that is still growing, but more weakly than last week when voters in Virginia and New Jersey swept away GOP candidates. In short, if there is going to be a big wave anyway, the condition of the economy is likely to increase somewhat  the intensity of that wave.

From Bonddad --

I agree with NDD's analysis, although approach it from a slightly different angle.  I wrote about it last week in my US Economic Week in Review.

Linkfest

Republicans have big decisions ahead with their tax plan (WaPo)
Is productivity growth really that slow? (FT)
Riskiest countries are selling debt at record levels (FT)
EU corporate issuance near record (FT)
Fundamentals still drive inflation (Bank of Canada)
Millenials LFPR research (Adviser Perspectives)
Euro economy heading for a golden period (BB)
Why the flatter yield curve matters (BB)